Web 2.0 Case Study – Netflix

The other day I was sitting around with friends chatting about the start of the semester when I mentioned a project I was working on for my Marketing on the Internet course. I explained that for my first assignment, I needed to profile a company with Web 2.0 attributes. This began a discussion amongst the group regarding the kinds of companies that succeed in this highly competitive, frequently volatile and often hard-to-quantify world of Web 2.0. The obvious giants are companies like Facebook and LinkedIn.

But as this discussion tapered into talks of weekend plans, I couldn’t help but keep thinking about the kinds of immense challenges a company that wasn’t an initial product of the Web 2.0 boom would face in this digital age. Many companies struggle with how to effectively move from mass production to mass customization, mass marketing to one-to-one marketing and mass media to personal media. This will continue to be a trend for businesses everywhere; those that succeed will live to see another day, and those companies that fail to see the value in tapping Web 2.0 technologies will be a thing of the past.

One company I found particularly interesting, and the one I am choosing to profile, is Netflix. Netflix was founded in 1997, just before Web 2.0 really took off in 2000 a couple of years later. As a result, it faced many challenges in its first years of operation. Within a short period of time, its business model, distribution channels and openness policies were turned upside down as a result of Web 2.0 and it was forced to change or become obsolete. I chose to profile Netflix because it is one of the few companies that were really able to adapt to a new business environment without losing revenue sources, which many web-based companies struggle with. In short, Netflix evolved into a Web 2.0 company.

netflix logo

Netflix recently reported signing up 2.05 million new Internet subscribers in the US during the fourth quarter of 2012. This brings its number of domestic online customers to 27.2 million. According to Bloomberg News, “the company finished the year with 33.3 million streaming subscribers worldwide and 8.22 million in the U.S. who get DVDs by mail.” Though Netflix still operates its 58 warehouse locations for the shipping of the nearly 89 million DVDs it owns via postage, its main business transactions take place on the Internet. These warehouses are not stores, so the entire business is of Netflix is conducted online. The company has many features that make it Web 2.0-adapted.

In terms of mass customization, Netflix has been there and done that. At its inception, when Netflix mainly dealt with online rentals of DVDs that needed to be physically shipped to customers, its highly effective supply chain and 900 employees worked in perfect synchrony the moment you hit the “submit” button on your personal computer. This still happens today for DVDs sent by mail, but increased streaming capabilities now allow customers to directly stream videos through the Internet from the Netflix website.

The pervasive power of the Internet and increased technologies have created more of a one-to-one marketing model employed by Netflix, as Web 2.0 gives it greater contact with the consumer. Upon signing up for an account, you are greeted with a personalized “Welcome, (insert name here)!” You are instantly a part of the community. This one-to-one strategy that simply requires you to make your own account, leaves Netflix with a significant amount of data on your viewing activities and preferences. This makes it easier for them to provide suggestions and cater to your wants and needs. For example, Netflix was able to make suggestions with this one-to-one marketing technology by looking at what I most recently watched…

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Here is another example of the one-to-one tactics Web 2.0 companies like Netflix can employ: when I filled out in my very own taste profile under my Netflix account, I was able to tell them that I like comedies, a witty joking style and strong female leads. This prompted Netflix to suggest a section to me called… wait for it… “Witty TV Comedies Featuring a Strong Female Lead.” Thank you, Netflix, that is precisely what I wanted. How were you so spot on with that?

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As you can see, Web 2.0 has really shifted the power from companies to individuals, from managing the brand to managing the consumer. As a consumer, having the ability to do things like rate and review the movies and TV shows I view on Netflix gives me the power to influence others’ decisions and provide Netflix with even more (believe it or not) of the information they need to better personalize my experience and, therefore, retain me as a customer.

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This new power of the consumer is requiring Web 2.0 companies like Netflix to evolve even further from mass media to personalized media. This is shift is still in the works, but is essentially giving consumers more choice when it comes to their media consumption. As opposed to being limited to television and radio, people are creating their own personal selections of media from the myriad of options around them that this digital age provides.

Netflix has actually been doing a really great job of anticipating this shift and is preparing for it. There are numerous ways to connect all of your devices, not just your personal computer or laptop, to your Netflix account. Netflix’ easy configuration lets you watch on everything from your HDTV, to your PS3, to your iPad or tablet.

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Additionally, as consumers continue to use mobile technology more and more, new platforms and ways to consume media are developing. Netflix now allows you to take your account and TV/movie watching anywhere with its support of mobile devices like the iPhone and Android. Our personal selections of media are making the world of marketing more complicated for companies, but Netflix is doing a nice job of keeping up with the trend towards personalized media as we progress through the Web 2.0 era.

According to a survey by Nielsen, in 2011, 42 percent of all Netflix users make use of a stand-alone computer to connect to Netflix, while 25 percent do so by using the Wii. An additional 14 percent access Netflix by connecting their computers to a TV, and 13 percent make use of a PlayStation 3.

Given these numbers, I would say Netflix is right on point with anticipating the kinds of platforms it should be further developing. Netflix also developed its own wii system, called the “Wii U,” which even has a second screen experience called the GamePad. Here is the first look at the product that launched in November:

In addition to all of these aforementioned empowered consumers and the remixing of digital content, Netflix has other Web 2.0 characteristics worth mentioning. One of these characteristics is its enabling technologies. It possesses RSS feeds that not only allow you to subscribe as a user, but allow the Netflix technology to add a little digital tag on the videos you select and archive them so that you may view them later. This subscriber component is important because that is how Netflix makes its money. Aside from selling ad space, many other Web 2.0 companies do not yet know how to make money off of their technology. Netflix requires a relatively small monthly fee compared to the amount of video you are allowed to stream (unlimited); not only is this good for consumers, but it allows for a constant revenue stream for the company.

In addition to RSS feeds, Netflix enables AJAX technologies. This allows content to load in your browser in a “behind the scenes” kind of way so that all of the media on the page is loaded and ready when you are ready to view it. Otherwise, we would have to wait hours for everything on one webpage to load. This is what makes the Netflix “Instant Queue” possible; you can load all of your videos and have them ready for instant streaming without even realizing what is going on behind the curtain to make it all happen.

Finally, the last Web 2.0 characteristic Netflix has is open sourcing. This goes hand-in-hand with collaboration and the Wikinomic principles of open sourcing, sharing peering. Netflix, surprisingly, has always had a fairly robust open sourcing network. It works to inspire user- and developer-generated content through its open sourcing activities. There are full communities of developers out there that work to make Netflix a better company with better technologies. Netflix works to share knowledge and has become know for pumping out some of the most innovative ideas for The Cloud.

Just last year Netflix launched its very own content delivery network. This is to help distribute content across the World Wide Web. Many people couldn’t believe that it open sourced all of the network’s components and encouraged the further betterment of its system. Netflix is held in high regard in the web-developing world.

In 2012 Netflix also developed and open sourced its famous “Chaos Monkey” system, in which it worked very closely with Amazon, one of its top competitors for video streaming. Chaos Monkey is a system meant to test random system failures to see how Netflix can respond. I found this particularly fascinating and innovative; not many companies would be willing to invite failure and open source the topic, “let’s think about how many times we can crash our system, see what our competitors think about it and then take their opinions into account.”

The "Chaos Monkey."

The “Chaos Monkey.”

Again, many people were confused as to why Netflix would open source some highly competitive and sensitive topics like this. But the answer is simpler than we try and make it. It all comes down to hiring. Netflix open sources because it wants the reputation of the best company to go to for the best-qualified people. This is a really interesting Web 2.0 characteristic that Netflix heavily utilizes and emphasizes. This goes along with another Wikinomic principle of peering. You want to hire the best people so that they can fit into a voluntary, highly motivated, self-organized and horizontal collaboration structure.

Netflix adheres to this in that it does not have any formal titles for its employees, other than the ones they create for themselves. They are also not required to be at work and may take as many vacation days as they would like. Employees are judged and evaluated on their creativity and innovative ideas they produce, not the number of days they report to an office. It is incredible that this anti-hierarchical structure can work for such a large organization, but it does! And while Netflix is currently in the process of expanding, it will be interesting to see if all of these horizontal structures and sharing can stay in place while it moves to international expansion and acting globally.

These internal and open source developer networks say a lot about the Netflix business model in general; people from all over are committed to the success of this company and the further betterment of its technologies. That is quite a feat in today’s highly competitive consumer marketing world. Netflix remains the giant among consumers in terms of the video streaming industry. Consumers tend to be loyal as a result of the constant innovation and, therefore, quality of service Netflix provides.

The Netflix business model, I would say, borders between the “Business Process” and “Enterprise” levels. This is because Netflix holds a competitive advantage and has redefined the streaming industry. It also incorporates sales promotions, business intelligence, dynamic pricing strategies and more onto its website. However, it does not exist only online. One area that it is lacking in, however, is the social networking component of Web 2.0 technologies. The open sourcing accounts for some of it, but Netflix did away with its “Friends” feature on the website due to unpopularity. Maybe Netflix could do more to integrate its Facebook and other social media properties with its website to really give it that final seal of cohesion.

Profiling Netflix’ evolution to a Web 2.0 company has proved exciting and fascinating. It says a lot about a company that can get off the ground as a new business, increase its market share the way Netflix did and still continue to innovate and change with the times. I can’t wait to see what companies like this do when Web 3.0 and IOS become the prevailing ways and technologies of tomorrow.

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